US 7962357 B2 Abstract System and method for determining maximal price for projects are provided. A project scope of a project based on a plurality of selected criteria is defined, and total cost of the project is estimated. A value model of the project is generated and estimated value of the project is determined using the value model. A composite object function that includes cumulative distributive functions of the total cost and of the estimated value is computed to determine potential maximal price or share rate or combinations thereof.
Claims(25) 1. A computer-implemented method for determining potential maximal price and/or share rate, comprising:
defining a project scope of a project based on a plurality of selected criteria;
estimating total cost of the project based on the project scope;
generating a value model of the project;
determining an estimated value of the project using the value model;
computing a composite objective function to determine potential maximal price or share rate or combinations thereof,
wherein the composite objective function includes maximizing (C(P))
^{K }(1−R(P)), where C(P) is a probability that the total cost is less than the potential maximal price, (1−R(P)) is a probability that the estimated value is larger than the potential maximal price, and K is an indicator that indicates a utility comparison between a service provider and a consumer.2. The method of
3. The method of
4. The method of
5. The method of
6. The method of
7. The method of
8. The method of
presenting said value of the project in financial benefit metrics.
9. The method of
10. The method of
11. The method of
12. The method of
13. The method of
14. The method of
15. The method of
generating the cumulative distributive functions of the total cost and of the estimated value; and
generating the composite objective function using the cumulative distributive functions of the total cost and of the estimated value.
16. A system for determining potential maximal price and/or share rate, comprising:
a processor;
a project cost estimator module operable to execute in a processor and further operable to define a project scope of a project based on a plurality of selected criteria, the project cost estimator module further operable to estimate total cost of the project based on the project scope;
a business value assessor module operable to execute in a processor and further operable to generate a value model of the project and determine an estimated value of the project using the value model; and
a maximal price calculator module operable to compute a composite objective function to determine potential maximal price or share rate or combinations thereof,
wherein the composite objective function includes maximizing (C(P))
^{K }(1−R(P)), where C(P) is a probability that the total cost is less than the potential maximal price, (1−R(P)) is a probability that the estimated value is larger than the potential maximal price, and K is an indicator that indicates a utility comparison between a service provider and a consumer.17. The system of
18. The system of
19. The system of
20. The system of
21. The system of
22. A program storage device readable by a machine, storing a program of instructions executable by the machine to perform a method of determining potential maximal price and/or share rate, comprising:
defining a project scope of a project based on a plurality of selected criteria;
estimating total cost of the project based on the project scope;
generating a value model of the project;
determining an estimated value of the project using the value model;
computing a composite objective function to determine potential maximal price or share rate or combinations thereof,
wherein the composite objective function includes maximizing (C(P))
^{K }(1−R(P)), where C(P) is a probability that the total cost is less than the potential maximal price, (1−R(P)) is a probability that the estimated value is larger than the potential maximal price, and K is an indicator that indicates a utility comparison between a service provider and a consumer.23. The program storage device of
24. The program storage device of
25. The program storage device of
Description This application is related to the following commonly-owned, co-pending United States Patent Applications filed on even date herewith, the entire contents and disclosure of each of which is expressly incorporated by reference herein as if fully set forth herein. U.S. patent application Ser. No. 12/040,579, for “SYSTEM AND METHOD FOR COMPOSITE PRICING OF SERVICES TO PROVIDE OPTIMAL BILL SCHEDULE”; U.S. patent application Ser. No. 12/040,595, for “SYSTEM AND METHOD FOR GENERATING OPTIMAL BILL/PAYMENT SCHEDULE”; U.S. patent application Ser. No. 12/040,472, for “SYSTEM AND METHOD FOR CALCULATING PIECEWISE PRICE AND INCENTIVE”. The present application generally relates to pricing of services, and more particularly to maximizing profitability by estimating both cost and business value of projects. Buyers and suppliers of information technology (IT) services today work with a variety of different pricing schemes to meet their individual project and business needs. Historically, the great majority of service contracts were billed on a time and materials basis. However, a recent market and business survey revealed that users and vendors are increasingly moving toward more flexible contract structures built around a combination of fixed-fee/fixed-bid service components and value-based/risk-reward mechanisms based on usage or defined service-level objectives. Common approaches to pricing include cost-oriented pricing, competitive-oriented pricing, and value-based pricing approaches. In cost-oriented pricing, the seller determines the cost involved in providing a specific service and adds the desired profit margin to calculate price. The cost is set based on the internal cost to deliver the service and/or product plus a target margin on the cost. In competitive-oriented pricing, price is determined with reference to the prices of the competitors. Value based pricing usually refers to the setting of price as a function of the expected value to be derived from the services and/or products. A set of value drivers in value-based pricing may vary from industry to industry. In a value based approach the price is based on the total value delivered to the client. Internal costs and target margins are only considered to ensure that the value-based price meets or exceeds the planned target margin. Value based pricing can provide greater negotiating leverage and ability to win the contract for services and/or products, and typically results in the higher profit margins. Thus, more and more projects are using value-based pricing model. Different value-based pricing models focus on different aspects for providing value-based pricing. For instance, part fixed/part risk-reward pricing model is a form of value-based pricing models that links the price to clearly defined business value improvements, for example, economic value to the customer for the goods/services that is provided. This economic value can be measured in additional revenue, cost savings, improved cash flow, inventory turns, etc. The following formulas illustrate some examples of determining value-based price using economic values: -
- Base Fee+gain sharing on cost savings (e.g., −10% cost savings every year for 3 years);
- Base Fee+gain sharing on completion date (e.g., +/−10% depending on defined implementation date);
- Base Fee+gain sharing on added value (e.g., link price to efficiency business process improvement);
- Base Fee+gain sharing on company level metrics (e.g., link price to corporate level metrics such as ROCE (Return on Capital Employed), ROA (Return on Assets); share price improvement of the client; KPIs (Key Performance Indicators) specified in balanced scorecard, meeting schedule, budget, and/or quality in project delivery; building capability in process and/or technology platform; client satisfaction).
Another example of value-based pricing model is self-funding pricing model. This model considers risks based on phased funding upon attainment of benefits. For example, first phase of work is funded based on the successful attainment of benefit for the next phases of work. Solution financing model provides yet another variation of value-based pricing model that includes complete or partial financing of an appropriate solution. Completely variable pricing is another value-based pricing model and links the price to clearly defined business value improvements and covers the entire project fee plus potential gain sharing based on some metrics. Utility/on-demand pricing is yet another example of value-based pricing model, in the form of “usage-based” feed, that is, price depending on usage of services, outsourced process performance, IT infrastructure usage. While many IT services firms utilize the value-based pricing models, others have varied pricing determination depending on the state of client's business goals and individual projects. For instance, if client's underlying business goals and maturity of its internal processes are small and have poorly scoped engagements, time and materials pricing is seen as the appropriate pricing model. On the other hand, if the client has well defined projects drawn from previous project experience, fixed-fee pricing is viewed as more appropriate. Among trusted partners, where the responsibilities of each player are clear and agreeable, value-based pricing is preferred since outstanding results can be delivered if done properly. In practicality, deals may incorporate a variety of components and situations resulting in a hybrid deal structure. Thus, it is desirable to have an automated system and method that can take into account the various and hybrid characteristics of a project or business goal and provide an optimal pricing model, for example, that is based on different pricing models for different sets of characteristics found in the overall project or business goal. Profitability can be extremely sensitive to changes in price. For instance, studies show that given a cost structure typical of large corporations, a 1% boost in price realization yields a net income gain of 12%. A pricing model that considers hybrid characteristics of a project and uses different pricing schemes and further optimizes the ratio of the usage of those different pricing schemes in the pricing model would provide better and more accurate pricing and result in much improved profit. A method and system for determining potential maximal price and/or share rate, which for example may be used in generating and/or using such pricing models are also desirable. A method and system for determining potential maximal price and/or share rate are provided. The method in one aspect may comprise defining a project scope of a project based on a plurality of selected criteria and estimating total cost of the project based on the project scope. The method may further include generating a value model of the project and determining an estimated value of the project using the value model. The method may also include computing a composite objective function, the composite objective function including a cumulative distributive functions of the total cost and of the estimated value to determine potential maximal price or share rate or combinations thereof. A system for determining potential maximal price and/or share rate, in one aspect, may comprise a project cost estimator module operable to execute in a processor and further operable to define a project scope of a project based on a plurality of selected criteria. The project cost estimator module may be further operable to estimate total cost of the project based on the project scope. A business value assessor module is operable to execute in a processor and further operable to generate a value model of the project and determine an estimated value of the project using the value model. A maximal price calculator module is operable to compute a composite objective function. The composite objective function may include cumulative distributive functions of the total cost and of the estimated value. Potential maximal price or share rate or combinations thereof, may be determined using the composite object function. A program storage device readable by a machine, tangibly embodying a program of instructions executable by the machine to perform a method of determining potential maximal price and/or share rate may be also provided. Further features as well as the structure and operation of various embodiments are described in detail below with reference to the accompanying drawings. In the drawings, like reference numbers indicate identical or functionally similar elements. Cost-plus approach determines price based on the internal cost to deliver, plus a target margin. In a value-based approach, the price is based on the total value delivered to the client. In this approach, internal costs and target margins are viewed only to ensure that the value-based price meets or exceeds the planned target margin. Generally, value-based pricing provides greater negotiating leverage, improving both margins and win rates. In one aspect, generation of potential maximum price Resource/cost item template The common project estimator module As an example for illustrative purposes, there may be a number of best-practices, (for example, 26 best-practices) or implementation project plans that are to be considered. A list of multi-dimensional implementation plans (26 combinations) may be presented to a user, for example, via a user interface. Some of the plans may be single-dimensional (e.g., By Geography, By Country, By Business Unit, and By Business Scenario), others 2-dimensional (By Geo-By Business Unit, By Geo-By Business Scenario, By Country-By Business Unit, and By Country-By Business Scenario), yet others 3-dimensional (By Geo-By Business Unit-By Business Scenario, By Geo-By Business Unit-By Business Scenario, By Country-By Business Unit-By Business Scenario, and By Country-By Business Scenario-By Business Unit). Table 1 presents a list of possible one, two, and three dimensional project plans according to an embodiment of the present disclosure. In one embodiment, the sector and industry dimension is not used in the multi-dimensional project plans, and Geo and country are not used together. In this embodiment, if a country is deemed important based on a user selected threshold, such as unit volume, or revenue, then country would be used instead of Geo (continent—a collection of countries within an area). Based on the user input collected from the form-based questionnaires, the project estimation system can calculate and present the scores of each of the multi-dimensional implementation plans in a table or form as shown in the user interface.
The common project estimator module
In one embodiment, one or more utility functions are used in constructing project type and/or structure. Utility function A has an x-axis with attribute values corresponding to the number of facilities located in a given continent or country. For example, if there are two facilities in a given country the utility function A has a value of 60. The utility function F represents a situation where a threshold parameter (X) determines the value for the utility function. For example if X represents a level of revenue in a given country, and the actual revenue is less than the threshold, the utility function F assumes a value of 30. Utility functions can be based on qualitative information as well, as illustrated by utility function D with attribute values based on qualitative measures such as L—low, M—medium, and H—high (which are assigned numeric values). An example of a qualitative measure based on user responses to the form-based questionnaires is the level of system integration required (low, medium, high). The utility functions may include step functions, non-linear functions, and linear functions. Table 3 illustrates examples of the assignments of the utility functions A-F shown in
Table 4 is a summary of inputs for the scoring functions and ordering factors. Input parameters include:
The columns headers of table 4 represent the attributes, while the row descriptors are example dimensions. At a corresponding intersection of a row and column a corresponding utility function is assigned.
The following equations are used in a multi-attribute utility mathematical model to calculate score for the various dimensional implementation project plans according to an embodiment of the invention. The ordering factors Oij (where i is the dimension of the grouping (e.g., 1—one-dimensional, 2—two-dimensional, etc.) and j varies from 1 to the number of possible grouping orders) correspond to the order in grouping the various Dimensions. For example, the value of O (1) Score of a single-dimensional implementation project plan
The score of a single-dimensional implementation project plan may be the weight average utility value across involved attributes multiplied by the single dimensional ordering factor, which scales up the score comparable to those of multi-dimensional implementation project plans. The score of a multi-dimensional implementation project plan may be the summation of the weight average utility value across involved attributes of each dimension, multiplied by ordering factors, which normalize the resulting score comparable to those of other implementation project plans, and reflect the effect of the orders of the involved dimensions. The above described an example method of estimating project cost for illustrative purposes. The method and system of the present disclosure, however, does not limit estimating project cost only by the method shown above. Rather, other methods may be used to estimate project cost. A common business value assessor module A maximal price calculator module A value map may comprise multiple levels. A level may represent business/IT services/solutions to be offered shown at
An objective of service consumer may be to maximize the probability that estimated business value is bigger than price, that is:
Considering both service provider and service consumer's preference, the composite optimization objective may be:
where, U is distributed in [0, 1], which represents the quality or condition of being urgent or pressing importance to the service consumer; I is distributed in [0, 1], which represents the quality or condition of being important or significance to the service consumer; R is distributed in [−1, 1], which represents reputation, the opinion (more technically, a social evaluation) of the public toward the service provider; C is distributed in [−1, 1], which represents commitment, pledged by the service provider. Potential maximal price generated according to the present disclosure in one embodiment may be used as input for the bill scheduler disclosed in U.S. patent application Ser. No. 12/040,579 and piecewise pricing disclosed in U.S. patent application Ser. No. 12/040,472. For instance, The method of the present disclosure in one embodiment may be embodied as a program, software, or computer instructions embodied in a computer or machine usable or readable medium, which causes the computer or machine to perform the steps of the method when executed on the computer, processor, and/or machine. The system and method of the present disclosure may be implemented and run on a general-purpose computer or computer system. The computer system may be any type of known or will be known systems and may typically include a processor, memory device, a storage device, input/output devices, internal buses, and/or a communications interface for communicating with other computer systems in conjunction with communication hardware and software, etc. The terms “computer system” and “computer network” as may be used in the present application may include a variety of combinations of fixed and/or portable computer hardware, software, peripherals, and storage devices. The computer system may include a plurality of individual components that are networked or otherwise linked to perform collaboratively, or may include one or more stand-alone components. The hardware and software components of the computer system of the present application may include and may be included within fixed and portable devices such as desktop, laptop, server. A module may be a component of a device, software, program, or system that implements some “functionality”, which can be embodied as software, hardware, firmware, electronic circuitry, or etc. The embodiments described above are illustrative examples and it should not be construed that the present invention is limited to these particular embodiments. Thus, various changes and modifications may be effected by one skilled in the art without departing from the spirit or scope of the invention as defined in the appended claims. For example, while the potential maximal price and share rate were described in terms of services, it should be understood that the system and method of the present disclosure also apply to goods, products, etc. or like. Patent Citations
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